A time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.

November 16, 2006

This should cause a bit of nervousness on this side of the pond. Hate to burst their bubble, but...

The TimesNovember 16, 2006

Banks told to predict effects of a 40% crash in house prices

BANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.

The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.

The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed.

It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.

In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points.

He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.

In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.

“We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan.

A few banks were “weak in all respects” in stress-testing.

House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.

Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.

The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.

Home Depot Inc. reported a 3-per-cent drop in profit in the three months that ended in October, amid mounting evidence that the U.S. housing slump is getting worse.

"I don't think we've seen the bottom yet, and I don't see anything that says it's going to get significantly better in 2007," said Bob Nardelli, Home Depot's chairman and chief executive officer.

Mr. Nardelli said job losses in the home construction market are the worst he's seen in 35 years, and the pain is starting to spread to the home renovation market.

"The loss of jobs . . . in the home construction market is at unprecedented levels," Mr. Nardelli told analysts on a conference call yesterday. "Home builders [are] basically writing off earnest money and liquidating land. We're starting to see a lot of that unemployment find its way over to the small repair and remodel contractors."

BRITAIN’S housing market is more overvalued than at any time since 1948 as buyers compete to snap up scarce properties, according to Dresdner Kleinwort.

The research will fuel fears that easy credit is inducing buyers to pay too much when buying their homes and over-stretch themselves financially.

The ratio of house prices to disposable incomes typically peaks at more than six times, the analysis reveals. On this measure, peaks in the housing market were seen in 1948, 1973, 1988 and 2006.

The current ratio is higher than in all previous episodes apart from 1948, when private homes were very scarce after the second world war.

David Owen, an economist at Dresdner Kleinwort, said: “There was an earlier period when inflation and interest rates were both low and the UK housing market was as expensive as it is today: the late 1940s. As in other housing corrections house prices then fell in real terms by over 30%. They also fell in nominal terms.”

After each previous peak, house prices went on to fall sharply in real terms, usually by more than 30%. In nominal terms, house prices fell in the low inflation period of the late 1940s and 1950s, including in 1949, 1952, 1953 and 1954. They also fell in nominal terms in 1990, 1991 and 1992.

The entire UK's economy is the London financial services industry.From a fundamentals pov, England hasn't produced anything since the fall of the Empire cerca 1965-1972.

So in a way, London's like NYC but without a country like the USA adjoining it. And if American corporations don't get their acts together soon, then the US will also go the way of England but at least there's some twenty years left of productive value in the States.

So, when there are other chic/happening cities like Amsterdam, Paris, or Milan for rich, globe trotting bankers/oil men/movie stars, why would they buy up 90-100% of the UK's properties just to help out the average Briton with an ARM? I think those posh places in Chelsea are already accounted for and the country's RE has only one way to go... down.

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"I hear the russians are especially interested in converting their wealth into UK assets so that when the government tries to steal the money back, it'll be overseas."

The only UK assets are RE, Pound Sterling, and Hedge fund shares/equity. So there's a limit to the diversification going on over there unless the foreigners are going to buy all of the UK.

Well, condos in NYC are also a million dollars per unit so it's one of those chic cities where rich people buy places, however, unlike NY, London is the only economy for the whole of the UK. If anything, RE in England is the South Sea bubble all over again except that this time, there's no USA to emigrate to for the average Briton like three centuries ago, whereas the US, still has a military-industrial research complex, raw materials (esp coal), biopharma, foodstuffs, etc so the collapse of America's service sector wouldn't destroy the country, it'll spawn a painful one or two decade bear market (ala depression) whereas England's toast if their hedge funds go belly up or the rich ex-Soviets start to look at Amsterdam or Copenhagen for places to buy. And to be frank with you, if I were rich, I'd much rather hang out in those places over England.

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"When the global economy melts down or world war breaks out, the question is where will you want to be? In London or Jerusalem? In Seattle or Damascus?"

When did banana republics vs real nations become the highlight of the issue?

If anything, Ottawa Canada is the safest place in the world and its real estate is the most affordable for a modern, developed, beautiful city by a river. The difference between Ottawa and London is that London serves a dual nature of being a hedge fund center (a.k.a. UK's NYC) and in a developed first world nation away from places like Russia or Syria.

So when a place is oversold, real estate in New York City, Vancouver, or London, it becomes another phenomena of overvalued parcels of land and units where the expectation is that the rich are going to soak up everything, keeping the average middle class person asset wealthy via the creation of a localized wealth effect. That's a bubble zone. A rich oil man can buy one or two units in London to meet with his broker, a mansion (or two) in Ottawa a/o Oslo for his multi-acre landed estate, and a basket of currencies including the pound, loonie, usd, euro, corona, and a pile of gold/silver all over the US, Canada, Australia, Germany, and England and the chances are that he'll retain his wealth even if there's an overthrow of his govt in Bahrain. Simultaneously, he's hedged his bet because not all major cities are going to implode 1990s Tokyo-style so his private RE holdings are nicely diversified to hold up during market downturns. I mean a lot of multi-millionaires got roasted because they'd bought hotels in Toyko in the 1980s thinking that they'd retain their RE equity, not to find themselves in an illiquid position costing them ten years later.

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::They say the wealth of the top .01% has increased 600% in 20 years. Has your paycheck? At that increase I guess 20% appreciation a year say in London sounds like a bargain buy.

Yes, I agree with the localization of the wealth effect and for that exact reason, Manhattan apartments average 1 million dollars per unit. But now think about this... the rich can only make money if they have an asset class that's of value to a certain number of people. So, when people find that living in NYC is too expensive for the *average* blue chip professional, earning $400K/yr, then that crowd, the upwardly mobile but not too rich gang loses interest in a region and moves into cheaper locales in New Jersey, Putnam, Rockland, and Nassau counties in NY state and then even offices, which handle the transactions for the wealthier clients, move there as well, once the body count reaches critical mass. And this is pretty much what happened to Tokyo, during the 80s, as all kinds of rich people started buying downtown properties at prices equivalent to owning entire city centers in places like Boston, Houston, and Philly. Well, at that point in time, the well off manager salarymen (~$400K/yr) at Japan Inc moved 2 hrs away and the entire city of Tokyo became one speculative region for land/units via rich RE players (including organized crime bosses). The rest is history. And the problem is that that's the issue, there are only so many Malibus, Hamptons, etc out there for the top 0.001%. The other top 0.5% also need places to live in and it's this crowd which keeps RE alive in happening regions.

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Someone else concurs:

"And the problem is that that's the issue, there are only so many Malibus, Hamptons, etc out there for the top 0.001%. The other top 0.5% also need places to live in and it's this crowd which keeps RE alive in happening regions."

Yep, high end enclaves are pretty much scoped out in much of the world. There are practically no "perfect" private beach castles in Tahiti, available for the average Japanese, European, or North American nowadays. Those places have already been bought out by millionaires or resort conglomerates which is why French Polynesia is one of the most expensive Pacific Island regions in the world.

In order for real estate to maintain an upward holding pattern in London, Sydney, NYC, or Los Angeles, the upwardly mobile professionals need to feel like they can afford to be a part of the action to generate the volume needed to create a real estate market or otherwise, we get a Tahiti situation where there are billionaire recluses and tourists hotels but no professional class buying places to live in.

I don't believe anyone is out there trying to expose the present housing sham out of the goodness of their hearts

Maybe they just want to be able to buy a house to live in without a 50 year mortgage? That's sure as hell why I'm hoping for a housing market crash over the next couple of years. So by the time I'll be ready to buy, prices will be more reasonable.

Hey Anon,I don't know why you are asking me if I think the $1.50 fee is an appropriate charge for an ATM withdrawal, but since you asked, I would say that under the right circumstances it can be the best $1.50 you ever spend!

If you are in a bind and strapped for cash, the ability to access your bank account from anywhere worldwide can be a life-saver. At other times, it can save you a trip to your bank, and these days the gas it takes to get you to your bank would cost more than the $1.50. Also, you can travel to other countries and withdraw local currency from an ATM without having to pay the ridiculous money exchange fees.

However, on a weekly basis, I would recommend using your own bank's ATM and save the money. However, if you ever need the convenience of using another bank's ATM, it is nice to know that service is available to you.

If you are in a bind and strapped for cash, the ability to access your bank account from anywhere worldwide can be a life-saver. At other times, it can save you a trip to your bank, and these days the gas it takes to get you to your bank would cost more than the $1.50.

But you see, this ""need"" and savings is utterly artificial caused by the lack of reciprocity and barriers intentionally imposed by banks. Sort of like your neighborhood mafioso's "protection" service. You're in Good Hands with Lefty, hmm?

Consider the Internet. By contrast even though there are intermediate links and subnetworks run by competitors they each reciprocally agree to pass back and forth each other's traffic. At some point there could be balancing payments for bulk bandwidth mismatches but it may be too much trouble to worry about for most.

Communistic? "inbound packets according to one's needs, and outbound packets according to one abilities"

Sure, but it works great.

Of course, some idiot rent-seeking monopoly telecoms have recently want to stop this excellent system.

They want to charge, e.g., Google for "better" access to their bandwidth to their other parties. Of course that's again artificial, they promise no physical improvements---but could easily start dropping a few packets here and there for those who decide not to pay up.

The balance of power might be opposite---they should be paying Google the way cable companies pay for programming. It is small websites and individual commerce which would be charged higher rates for no good reason other than "they can".

HAHAHAH! nice hey I went to the store the other evening to pick up milk and sh!t like that, so the line was long, and i stepped out of line to goto one of those lottery ticket machines (see where i am going with this)

I never, I repeat never buy scratch tickets, I bought a $5 ticket and hit $50,000 no bullshit...I was so excited I walked out the store with out paying for my shit! to funny..nice profit for a $5 dollar investment wouldn't you say! 10 day hold on that deposit..that new truck i was talking about a few weeks ago just got paid in full ...nice! and I paid my property taxes off for the year!..and still a nice profit...thought i would share my good fortune with you.

great read as to where you stand on the Income food chain per state...before you read this may i suggest a swig of booze, a big fat green bud, or a six pack, what ever your preference is, as it is quite depressing to say the least.

"I don't believe anyone is out there trying to expose the present housing sham out of the goodness of their hearts"

Look, I bought in the trough and I've made money and now my taxes are doubling because of excessive consumers.

I hate excess.

I hate it when people make quick money because more often than not it goes straight to their head and makes them think they're good instead of lucky. This leads them to keep on taking more risk instead of counting their lucky stars and they end up losing.

This affects society, community and relationships.

I know I'll be one of those picking up broekn pieces and I won't even be able to say I TOLD YOU SO!!!

Dear Borkafatty, congrats. I'm so glad you won and not one of the coward republicans around here. The only thing I want to happen to republicans is they die horrible prolonged painful meaningless deaths. Repukes are cowards and traitors, they don't deserve to be alive.

COLUMBUS OHIO (ZINGER) — The nations homebuilders are in a slump that could well end next spring. The Federal Reserve is suspected of extreme money pumping which is showing up in record high stock indexes.

Several states, including Ohio, have much higher minimum wages going into effect in the 1st quarter of '07; which is expected to create a wage push inflationary effect throughout the entire economy. Under the new Democrat controlled Congress it is widely expected that national minimum wage hikes will soon be enacted.

All of these events are causing our Money Supply to sky rocketing higher- which in turn will act to support a saging housing market at some point. Most likely the support will hit the market during the normally strong spring home buying season. [Z]

--------------------------------Zinger is a blogger on www.housingpanic.blogspot.com

I've seen builders in downtown L.A, as well as builders in San Bern County offer lucrative rebates to brokers these past two months. Some as high as 5% broker co/op. They've been increasing ever since about 2 to 3 months ago and possibly before that.

Sometimes you can tell that these builders, like K-Hov and Lee Homes, are getting a little desparate when they have overly optimistic articles when the market doesn't seem to share to much of that optimisum.

Buyers are scared that prices will continue falling but only because the tv says so. There are pockets of areas where values have gone up, stayed the same or even stabalized.

Here in downey ca where I live prices have remained the same over all. Since the market has just cooled off I don't know which way things are going to head.

What I do know is that sellers will have to realize that this is a buyers market and that listing agents will have to increase their buyer agent compensation to at least 3% along with seller incentives to buyers.

Increase buyer agent compensation to 3%? It's always been an equal split of 6% between listing/buyer agents around here....... Well, I guess most brokers are now charging a 7% listing fee so 3.5% a piece.

Bork said:"I never, I repeat never buy scratch tickets, I bought a $5 ticket and hit $50,000 no bullshit...I was so excited I walked out the store with out paying for my shit! to funny..nice profit for a $5 dollar investment wouldn't you say"!

I can't believe it Bork. Congrats to you! Thats funny because I don't gamble either and never play lotto, but I am thrilled you won big playing scratch-offs! Your right, you never know what's going to happen! Gee, maybe I should go buy afew! Psst-What lotto did you play?

I agree with Stinker- dont spend it all because the tax man wants 1/3 of your winnings!

Isn't there a plan in the UK to do 125% financing? Why stop there? Just add another 15% and the problem is solved.

Here's how this exciting new financial product might be structured: A 140%, interest-only loan with a 3-year, 2% teaser-rate, negative-amortization option. Better yet, add in another 10% to cover the mortgage payments for the first couple of years.

However, if house prices don't go up at least 20% per year during the teaser-rate period, 200% loans will then be needed.